12. Income Taxes

The components of the provision for income taxes for the Years Ended December 31, 2013 and 2012 are as follows:

 

		2013				2012
Current		$	—			$	—
Deferred			(5,679,857	)			(4,879,978	)
Valuation Allowance			5,679,857				4,879,978
Total provision for income taxes		$	—			$	—

At December 31, 2013 and 2012, the Company had temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their respective income tax bases, as measured by enacted state and federal tax rates, as follows:

 

		2013				2012
Deferred tax assets (liabilities):
Net operating loss carryforward		$	24,339,362			$	18,570,820
Bad debt reserve			48,263				48,725
Inventory reserve			11,840				95,229
Sales return allowance			12,546				69,848
Accrued vacation			32,098				20,338
Deferrals of compensation to Directors & Officers			9,596				9,596
Deferred grant revenue			—				8,729
Uniform capitalization (UNICAP)			(130	)			6,481
Non-qualified stock compensation			513,106				457,058
Restricted stock			42,590				42,590
Accrued Interest			(134,222	)			(134,222	)
Total deferred tax assets, net			24,875,049				19,195,192
Less valuation allowance			(24,875,049	)			(19,195,192	)
Total net deferred taxes		$	—			$	—

The following is a reconciliation of tax computed at the statutory federal rate to the income tax benefit in the statements of operations for the years ended December 31, 2013 and 2012:

 

		2013				2012
Income tax benefit computed at statutory federal rate of 34%		$	(5,463,376	)		$	(4,450,752	)
State income tax benefits, net of federal expense/benefit			(583,296	)			(475,183	)
Change in valuation allowance			5,679,857				4,879,978
Non-deductible expenses			248,178				54,879
Other			118,637				(8,922	)
Total		$	—			$	—

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the levels of historical taxable income and projections of future taxable income over which the deferred tax assets are deductible, the Company believes that it is more likely than not that it will not be able to realize the benefits of some of these deductible differences.

 

Accordingly, a valuation allowance of $24,875,049 and $19,195,192 has been provided in the accompanying financial statements as of December 31, 2013 and 2012, respectively. The 2013 net change in valuation allowance related to deferred tax assets was an increase of $5,679,857 primarily relating to net operating loss carryforwards. The 2012 net change in valuation allowance related to deferred tax assets was an increase of $4,879,978 primarily relating to net operating loss carryforwards.

At December 31, 2013, the Company has federal and state tax net operating loss carryforwards of approximately $64,151,000. The federal and state tax loss carryforward will expire through 2033, unless previously utilized. The Company also has federal research and development tax credit carryforwards of approximately $1,242,000. The federal tax credit carryforward will expire through 2023, unless previously utilized.

Pursuant to Internal Revenue Service Code Sections 382 and 383, use of the Company’s net operating losses and credit carryforwards are limited due to a cumulative change in ownership of more than 50% that occurred in 2009. As a result of the 50% change in ownership, the annual amount of pre-change net operating losses that may be used in periods subsequent to the change in ownership is approximately $417,000. The impact of this limitation is factored into management’s valuation allowance placed against the Company’s deferred tax assets.

For the years ended December 31, 2013 and 2012, the Company incurred $361,143 and $329,676, respectively, of additional unrecognized tax benefits that resulted in a decrease to the deferred tax asset valuation allowance, related to research and development credits. The entire amount of this unrecognized tax benefit, if recognized, would result in an increase to the deferred tax asset valuation allowance, and would not have an impact on the effective tax rate.

The Company files its income tax returns in the U.S. federal jurisdiction and in Florida. With few exceptions, the Company is no longer subject to federal or state income tax examinations by tax authorities for years before 2009.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

 

Balance as of December 31, 2011		$	550,962
Additions based on tax positions related to the current year			329,676
Additions for the tax positions of prior years			—
Reductions for the tax positions of prior years			—
Balance as of December 31, 2012		$	880,638
Additions based on tax positions related to the current year			361,143
Additions for the tax positions of prior years			—
Reductions for the tax positions of prior years			—
Balance as of December 31, 2013		$	1,241,781

Included in the balance at December 31, 2013 and 2012, are $1,241,781 and $880,638, respectively, of tax positions for which there is uncertainty about the validity of certain credits. The disallowance of the credits would impact the amount of gross deferred tax assets reflected in the accompanying footnotes.

During the years 2013 and 2012 the Company did not recognize any interest and penalties. Due to the potential offset of the Company’s operating loss carryforward for any future activity, the amount attributed to interest and penalties would be immaterial.